Venture Frms Pour Money Into Web 2.0

Venture firms are pouring money into Web 2.0 startups in hopes of funding the next MySpace or YouTube. But is the frenzy getting out of hand—again?

Venture capital investors have finally found something they're excited about.
After a sharp decline in investments following the tech bust of 2000 and 2001, venture firms are beginning to pour money into a new crop of Internet companies, in businesses such as social networking and online video. Together, they're called Web 2.0 companies. Venture firms have put a total of $455.5 million into 79 of them during the first nine months of the year, according to a study released on Nov. 7 by market researcher VentureOne, which is part of Dow Jones & Co. (DJ). That's more than twice the amount of money that was invested in such companies during the same period in 2005.

One of the reasons for the surge is the success of several high-profile Web 2.0 companies. Last year, News Corp. (NWS) bought the parent company of MySpace for $580 million, and the surging growth of the social networking leader has since made the deal look like a bargain (see BusinessWeek.com, 7/19/05, "News Corp.'s Place in MySpace"). Then in October, Google agreed to pay $1.65 billion for YouTube, the online video sensation (see BusinessWeek.com, 10/10/06, "YouTube's New Deep Pockets" and "Google Competitors Beware").

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